Planners have begun redrawing the route of the West Bank barrier after a ruling by Israel's High Court.
The barrier is dividing Palestinian communities
"We're looking at ways to bring the fence closer to the Green Line," said foreign ministry official Gideon Meir.
The new route is said to be closer to Israel's borders to ensure Palestinians are not cut off from their lands.
But Israeli officials insist the decision has nothing to do with a world court ruling last week that the barrier was illegal and must be removed.
Israel says the barrier is necessary to keep out suicide bombers; Palestinians call it a land grab that divides people from their families, jobs and schools.
The controversial network of fences and walls is planned to extend for 640km (400 miles) through occupied territory.
The landmark ruling by the Israeli High Court affects a 30km (19-mile) section of the barrier to the north and west of Jerusalem.
The Israeli defence ministry began a comprehensive review of the route of the barrier following the ruling.
New plans are expected to be submitted by the end of the week.
"Any irregular situation in which the fence needs to run less than one kilometre's distance from a Palestinian home must be approved personally" by central command chief Major General Moshe Kaplinsky, said Israeli newspaper Yediot Ahronot.
"The security establishment has also decided that no barrier will be built that separates Palestinian farmers from their fields and, therefore, no gates for agricultural crossing will be built in any of the future sections of the separation fence." the newspaper reported.
The High Court case was launched by Palestinian residents who said the barrier would disrupt the lives of 45,000 people in 10 villages by cutting them off from farms, schools and jobs.
The decision sets a precedent for cases in more than 20 other petitions against sections of the barrier which have either been built or are planned.